Founder of Private-Equity Firm Backed by Wealthy Families Settles With SEC

The Securities and Exchange Commission (SEC) recently announced a settlement with a middle market private equity firm and its founder, who was backed by wealthy families. The firm, without admitting or denying the SEC's findings, agreed to pay a $4 million civil money penalty, along with a cease and desist order and a censure. The settlement highlights the SEC's continued focus on material, nonpublic information (MNPI) compliance, even if the shared MNPI is not traded upon.

The private equity firm, which managed over $60 billion, was found to have failed to enforce its own policies to prevent the misuse of MNPI and misleading communications. Senior personnel of the firm improperly disclosed mergers and acquisitions-related MNPI and other confidential, strategic information to current and potential investors, as well as industry contacts. Although the firm utilized non-disclosure agreements (NDAs) with such investors and industry contacts, the SEC determined that such disclosure had not been deemed "necessary for legitimate business purposes," as required by the firm's policies.

Additionally, the firm's senior personnel communicated performance-related claims to investors and contacts based on unapproved valuations, which resulted in misleading communications. The SEC found that the firm's policies prohibited the use of unapproved valuations in communications, but senior personnel violated these policies.

The settlement serves as a reminder to other private-equity firms of the importance of MNPI compliance and the consequences of failing to meet these requirements, even if the MNPI is not misused. To avoid similar issues, firms should ensure that senior personnel adhere strictly to the firm's policies regarding MNPI disclosure and make the required determination before sharing such information. Additionally, firms should implement robust internal controls to prevent the misuse of MNPI and ensure accurate and transparent communication with investors.



In addition to the settlement with the private equity firm, the SEC has taken action against other major firms for failing to implement and enforce certain written policies and procedures to prevent the misuse of MNPI. In 2020, the SEC issued an order against another major private equity firm for failing to implement and enforce certain of its written policies and procedures, even though the SEC did not find any evidence of the manager misusing MNPI or otherwise performing insider trading. The SEC has previously alerted the industry about their continued focus on MNPI compliance, issuing risk alerts to investment advisers and investors covering deficiencies related to Section 204A of the Advisers Act.



The settlement with the private equity firm underscores the significant risk involved with failing to meet MNPI compliance requirements, even if the MNPI is not misused. Private-equity firms should take immediate action to address any potential weaknesses in their compliance programs and ensure that they are adequately protecting investors and maintaining the integrity of the market. By doing so, firms can help to restore investor confidence and position themselves for future success.

In conclusion, the settlement with the private equity firm serves as a cautionary tale for other firms in the industry. The SEC's continued focus on MNPI compliance highlights the importance of adhering to firm policies and implementing robust internal controls to prevent the misuse of MNPI and misleading communications. By taking these steps, firms can help to ensure the integrity of the market and protect the interests of investors.